Good afternoon, and welcome to WEC Energy Group's Conference Call for 4th Quarter and Year End 2019 Results. This call is being recorded for rebroadcast and all participants are in a listen only mode at this time. That are subject to change at any time. Such statements are based on management's expectations at the time they are made. In addition to the assumptions and other factors referred to in connection with the statements, factors described in WEC Energy Group's latest Form 10 ks and subsequent reports filed with the Securities and Exchange Commission could cause actual results to differ materially from those contemplated.
During the discussions, referenced earnings per share will be based on diluted earnings per share unless otherwise noted. After the presentation, the conference will be open to analysts for questions and answers. In conjunction with this call, a package of detailed financial information And now it is my pleasure to introduce Gale Klappa, Executive Chairman of WEC Energy Group.
Good afternoon, everyone. Thank you for joining us today as we review our results for calendar year 2019. First, I'd like to introduce the members of our management team who are here with me today. We have Kevin Fletcher, President and CEO Scott Lauber, Chief Financial Officer Bill Guck, our Controller Peggy Kelsey, Executive Vice President and General Counsel Tony Rees, Treasurer and Wes Straka, Senior Vice President of Corporate Communications and Investor Relations. Scott will discuss our financial results in detail in just a moment, but as you saw from our news release this morning, we reported full year 2019 earnings of $3.58 a share.
And I'm pleased to report that we delivered a record year on virtually every meaningful measure of performance from customer satisfaction to a swift recovery from severe July storms that caused extensive damage to our system. As we review our financial results, our balance sheet continues to strengthen. In fact, our ratio of holding company debt to total debt now stands at 28% that beats our 30% goal. In 2019, we also eliminated a regulatory asset for transmission costs and we continue to leverage the benefits of tax reform for both customers and shareholders. In addition, we worked effectively to settle our Wisconsin rate reviews, which represent approximately 70% of our regulated assets.
We also took our environmental efforts a step further. We set a new goal in 2019 to reduce the rate of methane emissions from our natural gas distribution system by 30% per mile by the year 2,030. Our ongoing work to modernize Chicago's natural gas delivery network is key to achieving this goal. And we continue to analyze our climate related risks and opportunities. In fact, a recent Moody's report focused on the risk exposure of regulated utilities to heat stress, water stress and extreme rainfall.
I'm pleased to note that WEC Energy ranked among the lowest risk companies in our sector. During 2019, we also reached a number of significant milestones in our infrastructure segment. The Coyote Ridge Wind Farm is now in service in South Dakota and will contribute a full year of earnings in 2020. As you may recall, Coyote Ridge consists of 39 turbines with a capacity of roughly 97 megawatts. We invested approximately $145,000,000 for our 80% share of the wind farm we're entitled to 99% of the tax benefits.
As you know, a significant portion of our earnings from this facility come in the form of production tax credits. Project has a 12 year offtake agreement with Google Energy LLC for all of the energy produced. We also announced back in September that we will acquire an 80% ownership interest in the Thunderhead Wind Energy Center for $338,000,000 Wind Energy is developing this project in Nebraska and we expect it to be in service at the end of 2020. The site will consist of 108 GE wind turbines with a combined capacity of 300 megawatts. The project has a long term offtake agreement with AT and T for 100% of the energy produced.
We expect Thunderhead will qualify for production tax credits and 100% bonus depreciation. Then earlier this week folks, we announced plans for another new development. We've agreed to acquire an 80 percent ownership interest in the Blooming Grove Wind Farm for $345,000,000 Invenergy is developing this project in Illinois with commercial operation expected to begin by the end of this year. The site will host 94 wind turbines with a total capacity of 2 50 megawatts. Blooming Grove has a 12 year off take agreement with affiliates of 2 multinational companies that are investment grade.
We expect that Blooming Grove will be eligible for 100% bonus depreciation as well as production tax credits. Overall, we're very encouraged about these investments in renewable energy, which will serve strong businesses for years to come. We expect the return on these investments to be higher than our regulated returns. Of course, we're being very selective as we vet future projects. We're only interested in projects that achieve our financial return metrics and do not change our risk profile.
Now let's take a brief look at the regional economy that's supporting our company's longer term growth. Wisconsin's unemployment remains near record lows for the state we continue to see strong economic development projects in the pipeline. Foxconn is moving forward with its plan to create a high-tech campus in Racine County, South of Milwaukee. Work on a Generation 6 fabrication plant for liquid crystal display screens is progressing. The fab, which spans about 1,000,000 square feet is now enclosed and work is beginning on the internal structures.
Foundations are also in place for a high capacity data center. In addition, Foxconn has announced plans for a smart manufacturing facility. Construction crews began lifting the exterior walls into place for the smart manufacturing plant earlier this week. Based on public data, we estimate that Foxconn's investment in Wisconsin over the past 2 years has risen to approximately $500,000,000 Turning a bit further south in the Kenosha area, Uline has announced plans to invest $130,000,000 in 2 new facilities and bring approximately 350 new jobs to the area. Uline, as you may know, is a leading distributor of shipping, industrial and packaging supplies with headquarters here in Wisconsin.
In addition, Milwaukee Tool has announced another expansion. Milwaukee Tool will invest $100,000,000 a large multipurpose campus northwest of the city in Menomonee Falls. The company also committed to adding 8 70 jobs in Wisconsin on the year 2025. These are exciting times. We look forward to more economic development and opportunity across the region.
Now I'll turn the call over to Kevin for more insight on our operations and our regulatory calendar. Kevin, all yours.
Thank you, Gail. First, I'd like to share some good news. Our largest subsidiary, We Energies, was named the most reliable electric utility in the Midwest for the 9th year running. Wisconsin Public Service also was recognized for the first time for outstanding reliability performance. Now I'll briefly review where we stand in our 4 state jurisdictions.
As you'll recall, in March of last year, we filed a proposal with the Public Service Commission of Wisconsin to set customer rates for WE Energies and Wisconsin Public Service. And in August, we entered into settlement agreements with the Citizens Utility Board of Wisconsin, the Wisconsin Industrial Energy Group and Clean Wisconsin. On December 19, the commission issued its written order affirming those settlement agreements and setting rates for the next 2 years. New rates went into effect on January 1. During 2019, we also continued to make progress in developing solar generation for our regulated businesses in Wisconsin.
You may recall that in Wisconsin, we're planning a total of 300 megawatts of utility scale solar capacity, the first facilities of this size in the state. We've broken ground on 2 solar projects for Wisconsin Public Service, Two Creeks and Doctor. Hollow I. Our share will total 200 megawatts with an expected investment of approximately $260,000,000 Both projects are scheduled to begin producing energy by the end of this year. And this past August, at We Energies, we filed with We expect to receive the commission's decision this spring.
We also see efficient natural gas storage as another important part of our regulated business strategy. In particular, Wisconsin needs more natural gas peaking capacity at the highest demand times on the coldest days. We're continuing to evaluate site plans for 2 liquefied natural gas facilities to help meet our customers' needs during the winter peak. We expect to invest approximately $370,000,000 in these projects. If approved by the Wisconsin Commission, construction is expected to begin in the summer of 2021.
Turning to Illinois, we continue making progress on the Peoples Gas System Modernization Program. This program is critical to providing our Chicago customers with a natural gas delivery network that is modern, safe and reliable. We're approximately 28% complete with our replacement of outdated, corroded natural gas piping, some of which was installed more than a century ago. We continue to project an investment of $280,000,000 to $300,000,000 per year on average in this program. Now we'll turn to Michigan.
In 2019, we completed our new natural gas fired power plants in Michigan's Upper Peninsula on time and on budget. These plants are now providing a cost effective long term power supply for our customers in the Upper Peninsula. With these new units operating, we were able to retire our older, less efficient coal fired plant at Presque Isle. This resulted in significant operations and maintenance savings and reduced CO2 emissions. Taking a broader look across our business, we continue to focus on operating efficiency and financial discipline.
As a whole, we exceeded our 2019 goal to reduce our day to day operation and maintenance costs. Our goal was a reduction of 4 percent and we actually achieved a 7% reduction. We have set a goal to further reduce our O and M by an incremental 2% to 3% in 2020 as well. And with that, I'll turn it back to Gale.
Kevin, thank you very much. As you'll recall, ladies and gentlemen, our 2020 guidance is in a range of $3.71 a share to $3.75 a share. This translates to an earnings growth of between 6% and 7.1 percent of our 2019 base of $3.50 a share. Recall that $3.50 a share was the midpoint of our original guidance for 2019. And finally, a word about our dividend policy.
In its January meeting, our Board of Directors raised the quarterly cash dividend to $0.6325 a share for the Q1 of 2020. An increase of 7.2%. The new quarterly dividend is equivalent to an annual rate of $2.53 a share. This marks the 17th, count them, 17th consecutive year that our company will reward shareholders with higher dividends. We continue to target its payout ratio of 65% to 70% of earnings.
We're right in the middle of that range now, so I expect our dividend growth will continue to be in line with the growth in our earnings per share. And now with details on our 2019 results and our outlook for 2020 is our CFO, Scott Laufer. Scott?
Thank you, Gail. Our 2019 earnings of $3.58 per share increased $0.24 per share compared to 2018, a 7.2% increase. In 2019, we benefited from additional capital investment, production tax credits and continued emphasis on cost control. While all of our utilities met their financial goals, our Wisconsin utilities earned their fully allowed ROE and customers will see the benefit going forward through the sharing mechanism. We posted the earnings packet to our website this morning and includes a comparison of 4th quarter and full year results.
My focus will be on the full year beginning with operating income by segment and then other income, interest expense and income taxes. Referring to Page 10 of the earnings packet, our consolidated operating income for 2019 was $1,530,000,000 as compared to operating income of $1,470,100,000 in 2018, an increase of $63,000,000 Recall that as part of our previous rate settlement in Wisconsin, we agreed to apply the benefits of tax repairs to offset the growth of certain regulatory assets. The plan continued through year end and as we expected, the transmission escrow asset balance at We Energies was eliminated. My update will focus on changes in operating income by segment, excluding the impact of tax repairs and our adoption of the new lease accounting rules. Starting with the Wisconsin segment, operating income increased $42,000,000 net of these adjustments.
Lower operation and maintenance expense resulted in approximately $105,000,000 increase in operating income, driven by efficiencies and effective cost control across the enterprise. This positive impact on operating income was largely offset by a few items. First, lower sales volume due to primarily cooler summer weather conditions accounted for approximately $26,000,000 decrease in operating income. 2nd, depreciation and amortization increased $35,000,000 as we continue to execute on our capital plan. And finally, operating income was reduced by a $22,000,000 tax item that flowed through operating income.
This was fully offset by a reduction in tax expense. In Illinois, operating income increased by $36,000,000 primarily as a result of our continued investment in the safety and reliability of the Peoples Gas System. Operating income at our other state segment decreased $3,500,000 Turning now to our Energy Infrastructure segment. Operating income at this segment was up $800,000 driven by additional investment in our Power of the Future plants. As expected, the Bishop Hill Upstream and Coyote Ridge wind farms did not have a material impact on operating income.
Recall, a significant portion of earnings from these wind farms come in the form of production tax credits, which are recognized as an offset to income tax expense. These production tax credits contributed approximately $0.08 per share to our earnings for the year compared to $0.01 in 2018. The operating loss at our Corporate and Other segment increased by $12,000,000 This variance reflects a $5,300,000 gain that we recorded in 2018 related to the sale of our legacy business as well as an impairment recorded in the Q4 of 2019 on assets that we inherited from the Entegris acquisition. Combining these variances and excluding the impact of tax repairs and the new lease rules, consolidated operating income increased 62 point $8,000,000 Earnings from our investment in American Transmission Company totaled $128,000,000 a decrease of $9,100,000 as compared to 2018. Our earnings from ATC decreased by $19,000,000 as a result of the recent FERC order addressing the MISO complaints.
Going forward, we are recording ATC earnings assuming a 10.38% return on equity. This includes a 50 basis point adder for our participation in MISO. Other income net increased by $32,000,000 driven by investment gains associated with our benefit plans. Note that these investment gains partially offset the benefit expense included in our operating segment. The remaining increase relates to the non service cost component of our pension and benefit plans.
Our net interest expense increased by $53,000,000 mostly due to higher long term debt balances to fund the capital investment. This excludes the impact of the new lease guidance. Our consolidated income tax expense, net of tax repairs, decreased by $42,000,000 The major drivers were production tax credits from our wind investments and the 2018 tax reform item that I mentioned earlier. Our 2019 effective tax rate was 9.9%. Excluding the benefits of tax repairs, our 2019 effective tax rate would have been 20.6%.
Looking forward, we expect the 2020 effective tax rate to be in the range of 16% to 17%. This includes the effects of the unprotected tax benefits that are being refunded to customers following our recent Wisconsin rate decision. Excluding these benefits, we expect our 2020 effective tax rate to be between 20% 21%. At this time, we expect to be a modest taxpayer in 2020. Our projections show that we'll be able to efficiently utilize our tax position with our capital plan.
Turning to our cash flow statement. Our FFO to debt was 18.5% in 2019. Looking ahead, we expect FFO to debt to be in the range of 16% to 18%. We are using cash to satisfy any shares required for our 4 zero one plans, options and other programs. Going forward, we do not expect to issue any additional shares.
Total capital expenditures and asset acquisitions were $2,500,000,000 in 20 19, a $112,000,000 increase from 2018. Turning now to sales. We continue to see customer growth across our system. At the end of 2019, our utilities were serving approximately 10,000 more electric and 14,000 more natural gas customers compared to a year ago. Retail electric and natural gas sales volumes are shown on Page 1314 of the earnings packet.
Overall, retail deliveries of electricity, excluding the iron ore mine, were down 2.8% compared to 2018 and on a weather normal basis deliveries were down 1.7%. Natural gas deliveries in Wisconsin increased 2.6% versus 2018 and by 1.8% on a weather normal basis. This excludes gas used for power generation. And now I'll briefly touch on our 2020 sales forecast for our Wisconsin segment. We are forecasting a slight decrease of 0.5% of 1% in weather normalized retail electric deliveries excluding the Arnor mine.
We project the Wisconsin weather normalized retail gas deliveries to increase by 0.7 percent. This excludes gas used for power generation and of course both of these projections are adjusted for leap year in 2020. Finally, let's look at our guidance for the Q1 of 2020. Last year, we earned $1.33 per share in the Q1. As you recall, this included approximately $0.04 related to the colder than normal weather in 2019.
Factoring in this and the 16% warmer than normal January, we project Q1 2020 earnings to be in the range of $1.32 per share to $1.34 per share. This assumes normal weather for the rest of the quarter. And with that, I'll turn things back to Gail. Scott, thank
you very much. Overall, we're continuing to perform at a high level, on track and focused on delivering value for our customers and our stockholders. Operator, we're ready now to open it up for the question and answer portion of the call.
Thank you. Now we will take your Your first question comes from Shahriar Pourreza with Guggenheim Partners. Your line is open.
Rock and roll, Shar.
Hey, good morning, guys. How are you doing?
Good. How are you?
Good. Not too bad. So let me just a couple of questions here. You guys are backfilling this infrastructure capital budget relatively fast, especially with last week's acquisition. What's the spending shape look like given sort of these recent opportunities, I.
E, is there any opportunity to provide upside to your current guide or is this just kind of an acceleration of that spend? And then Scott, I know you mentioned on the cash tax position being a partial payer, but does that include last week's acquisition? Just wanted to get
a little bit of clarity there.
Well, Cheryl, we'll be happy to answer those questions. First, I would view our announcement this week on Blooming Grove as basically an acceleration of the 5 year plan. If you kind of look at what we've accomplished so far with what we believe are very high quality projects, We're almost we're about 38% already in terms of the projects that we have agreed to acquire. We're at about 38% of the spending we projected in our 5 year plan. But I would view it as an acceleration and I will tell you why.
Our 5 year plan, which projected about $1,800,000,000 in this particular segment of capital spending, essentially was a happy marriage of the high quality projects that we saw that we really had a strong interest in coupled with our ability to utilize all of the tax benefits. You put all that together and it kind of shook out at $1,800,000,000 So Scott, I would view this as
an acceleration. Right. It's just the timing. And when you look at the tax position and we say a very small taxpayer, it's going to be under $15,000,000 $20,000,000 because of the tax rules, there are still some tax statements that are made. But as you know, we're slowly starting with the PTCs work into 2021 and then too.
So that will not be a full taxpayer in 2021. But still when you look at our 5 year plan,
a lot of capacity on our tax side. And Shar,
remember, this particular windfall is side. And Shar, remember
this particular wind farm doesn't come into service until the very end of 2020.
Right. Got it. Okay. And then just on the regulated renewables, there's obviously a lot that you're doing there. Can I just get a sense on how this could read through on that
as we continue to review our demand forecasts, our needs, the impact of renewables, but that is still something that's on the table, Shar?
Got it. And then
just lastly, Gail, it's a little bit more of a policy question. I mean, obviously, we had a commissioner announcement last couple of weeks ago around the resignation. So we're obviously likely going to see a bit of a democratic shift with the Niivers appointment. Is there kind of any read throughs that we should be thinking about from a policy standpoint as it looks like the majority may change business as usual or could this kind of accelerate some of the solar decarbonization plans that are out there?
My own sense is I would look at any additional appointment to the commission largely as business as usual. But I will say and remind everyone that the governor has appointed a climate task force. He's announced a aspirational goal late last year to basically have carbon free electricity by 2,050. And this task force on which our company is represented at its actual first meeting just a week or so ago. So during this year, I think you will see some policy recommendations related to decarbonization coming out of this task force.
In many ways, the Public Service Commission would, in all probability, need to implement some of those policy changes if they were adopted. But the policy shift that I would see coming, if there is one, would really come through the Governor's task force on climate change, that makes sense to you.
It does. That's what we thought. Well, congrats guys on continued execution.
Terrific. We'll see you soon.
We'll see you
soon. Your next question comes from Greg Gordon with Evercore ISI. Your line is open.
Go Bucks. Hey, good afternoon.
How are
you, Greg?
I'm good. Your stock hit par today. Congratulations.
Thank you.
Let's can we ask
Greg, does that mean we're looking for a bogey or what does that mean?
We'll talk about an over under on the end of the year offline, Gail. I'm happy to wager with you. Very good. But the can we unpack the O and M performance a little bit because it really is quite impressive. If
I look at Page 8 of
your release, I think what you're telling me, I should be looking at the O and M as adjusted for impact of the flow through of tax repairs, right? Like that's like the clean number. Yes, that's correct. And it's down dramatically. And all the more so, I think, because when I look at the rabbi trust activity, that's basically offset in O and M by an offsetting adjustment in O and M.
So if I Rabbi Trust activity, the O and M comparison would be even better than it looks. Is that I think that's correct. And if so, can you unpack for us what the sort of structural savings are that are now flowing through on a full year basis from the activities you pursued, there are sort of permanent benefits. And I think there's more to come with the investments you've made in your investment in technology and things like that. So I'm just wondering, A, what's the structural improvement in O and M?
Where do they come from? And B, what's the follow on from continued activities on that front?
I'd be happy to. Let me frame all of this for you and then we're going to let Scott and Kevin weigh in on some of the details. But we did have an exceptional quarter in terms of continued efficiencies across the business. And there are a couple of factors that I think are important here. The first is that during 2019, we saw essentially pretty much a full year benefit of the implementation of our ERP system across the entire enterprise.
So that was helpful. And we're continuing as people get used to that new system, we're continuing to see efficiencies and benefits that we thought we would. And then compared to Q4 of a year ago, compared to Q4 of 2018, for example, there were significant O and M savings related to the closure of coal fired power plants. Remember in we've basically over the last several months and year and a half or so, we've retired 3 older less efficient coal fired power plants. The units at Presque Isle up in the upper Peninsula of Michigan were the latest to be retired in the spring of 2019.
We have the Pulliam plant near Green Bay retired and we had Pleasant Prairie retired. So we're seeing in the Q4, we saw O and M benefits flow through from no longer having to incur O and M for the operation of those plants. Then we had some of our technology investments continue to kick in. And as Kevin said, we're projecting additional O and M savings that we think we're going to gain here and we're on track to gain in 2020. So Scott, Kevin, anything you'd like to add?
Yes, you mentioned ERP, but if you look at the common platforms across our system in the Q4 of this year, we'll complete our customer information system to have that across all of our companies. We have already seen even this past year some savings from what we have in place already. But in addition to that through last year and focusing on the future, just looking at process improvements. So as we look across our jurisdictions, do benchmarking, we're looking at common standards and where it makes sense to have a proactive and similar approaches across our system. That has produced some positive results for us on O and M reduction and we'll continue to.
Scott, anything to add?
I don't think there's anything else. It is across the enterprise though. Everyone has O and M takeout opportunities and efficiencies
to gain. And we're doing that Greg, which I'm very pleased about and I thought we would be able to. We're doing that while increasing customer satisfaction. So that's one of the reasons I mentioned earlier in my remarks. As we track our operational and financial performance, we had a record year across virtually every meaningful measure of performance.
Right. So there is an incremental improvement on run rate O and M as you get to the sort of fully baked savings from the coal plant closures. And then there's incremental O and M benefits, but from the that you think you'll get from the ERP and also from the rollout of the CIS amongst other things.
You've nailed it. That's exactly right.
Your next question comes from Julien Dumoulin Smith with Bank of America. Your line is open.
Hey, how are you guys doing? What's shaking? Hey, not too much. So just following up on Greg's question here. I think that's really germane.
Can we dig in a little bit further to the prospects to sustain these levels of cost reductions? I mean, they're really quite dramatic. I mean, I think Greg emphasized it enough, but the point being, how sustainable are these just given how outsized they appear to be relative to the balance of the sector, not just on a trailing basis, but prospectively for 2020 here as you think through the balance of your planning period. And maybe even to push the point a little bit further, how identified is it just not just in 2020, but through the balance of your financial period that you're forecasting in terms of these levels of reductions?
Well, I'll take a stab at that. Certainly, Scott can add anything he would like to and Kevin as well. Let me say this, we believe and I think our track record demonstrates that the kind of cost savings that you saw that we continue to believe are going to continue on a downward path, those are very sustainable. We wouldn't be publicly committing to them if we didn't think we could absolutely sustain them. So again, we took 7% of the day to day O and M out of the business in 2019 and the 2% to 3% projected reduction in 2020.
And again, we're doing this, I think, in a very highly planned and deliberate way. And a good chunk of it is coming really from 2 areas. One, we mentioned before that we're getting the full benefit of now and that's the O and M takeout from the closure of less efficient coal fired power plants. But the other is the investment in technology. So my view, guys, would be highly sustainable.
Gail, I would agree that we just mentioned a couple of things that we're doing, but let me add one more on the customer service side that we have and are investing in our AMI infrastructure and we've seen savings from having that in place to reduce the rolls of truck that will continue and we'll see those opportunities ahead in the coming years. Also leveraging technology like mobile apps as an example, as we get that out into our customers, we'll be able to more interaction with our customers and give them opportunities to pay their bills online, minimize paper billing, things of that nature. So I would agree the sustainability of that is built into a lot of what we're doing customer service side, especially with the things that I just mentioned.
Let me if I can please to jump in a little further. What about the compounding nature of that trajectory rate? 2% to 3% is impressive, but through your forecast period, do you anticipate compounding of that trajectory? And then perhaps the really relevant second question is you've done it before. How do we think about the cadence of rate cases?
And I know we're getting out a little bit, but just given the scale of cost reductions here, certainly the question doesn't seem too early in terms of across any one of your jurisdictions given the enterprise wide cost reductions that are contemplated here, I mean, I. E, pushing them out.
I'm chuckling because we just got through the rate reviews for 70% of our regulated assets.
I know, I recognize it, but then the cost reductions are incredible.
Well, we appreciate that. Let me say this, historically, as you know, in Wisconsin, the commission has liked and has really requested in every 2 year cadence for rate reviews. Now that's not to say that's set in concrete. We'll take a look at it as we go forward and see where we are, see where the commission's sentiment is, etcetera. But long story short, we feel very good about our ability to execute and again do so in a way that maintains high reliability and high levels of customer satisfaction.
Okay. Too early to tell.
Too early to tell. Too early to tell. Too early to tell space.
Got it. Excellent. I'll leave it there. Thank you.
Okay. Thank you, Julian.
Your next question comes from Michael Sullivan with Wolfe Research. Your line is open.
Good afternoon, Michael.
Yes. Hey, everyone. Just one more on the O and M. Do you guys assume for earned ROEs now that you've got this kind of different sharing band where you could over earn a little bit before you give back to customers? Where does this these O and M savings targets put you on a earned ROE basis?
We're assuming as we have in the past that we earn the allowed rates of return in each one of our retail jurisdictions.
Okay. Sorry, just to clarify, is that like at the electric utilities, the 10% or up to the 10.25% that you can do before sharing?
Right now, we're assuming 10%.
Okay. And then over to the sales growth. So I think for 2020 electric, you're forecasting down a little bit. And if we go back to some of your EEI slides, there's supposed to be a tick up in the next couple of years and more so as you get into 2022, 2023. Can you just give us some color around key milestones that we should be looking for on economic growth that's going to bridge that from down a little bit to up closer to 1%?
Yes, happy to, Michael. First of all, the uptick that we continue to project, and it's a pretty slight uptick, the uptick that we're projecting in the 2022, 2023 time frame is really driven by the amazing economic development projects that I talked about a little earlier in our remarks. We have not seen any slowdown in terms of the number of economic development projects, the amount of new construction, just the continuing economic growth in the pipeline of projects that are being announced here in Southeastern Wisconsin in particular. So we still feel pretty confident about the uptick in the longer term. The shorter term meaning for 2020 is really driven by like for example the large industrial segment.
It's really driven by the interviews that our people have with our key account customers and feedback into our projections. It's also driven a bit by weather normalization. Remember, we had 2 warmer than normal summers back to back. So you look at weather normalization, you look at conservation, you look at real time feedback from our major industrial customers and you put it all together and it's like Ragu, it's in there. That's what comes out.
And so in total, a very modest decline, I believe, Scott, 1 half of 1 percent is what we're projecting on retail absent the mines.
Correct. So a very modest decline. And once again, the projections that we have in the investor book are really the only projects that we know. It doesn't include the residential and secondary that we expect to come from it. It's just the Nolan projects that have actually started turning dirt already.
So it just takes a while to build the building and start using it. So we expect those are still on track to be coming. And like Gail said, our forecast is really out there talking to our customers and really fine tuning it and the information we have here is the best information we have.
And we're still projecting even with a modest 0.5% decline, we're still projecting 6% to 7% EPS growth.
Great. Appreciate all the color. That's all I had. Thank you.
Your next question comes from Praful Mehta with Citigroup. Your line is open.
Good afternoon, Praful.
How are you?
Very good. Congratulations on the quarter.
Thank you very much.
Thanks. So maybe just, I think I guess the O and M point has been already debated and answered, so appreciate that. I think on the energy infrastructure side, the $1,800,000,000 that was planned, you said you accelerated it with this latest acquisition. Do you expect with the tax appetite being what it is further down the road, do you expect that size to increase through the 2024 timeframe? Or do you expect the $1,800,000,000 to still be the cap?
At the moment, again, we'll continue to look at this. But at the moment, I would view this as an acceleration and the $1,800,000,000 for the 5 years is still what we are looking at.
Got you. And then when we think about the tax appetite and you've said that you'd be a small taxpayer, How should we think about that tax paying capacity in the 2023, 2024 timeframe? Is that you're still a small taxpayer at that point or is that capacity increasing over time?
Well, when you still look and you work everything in, we would still be a small taxpayer getting into that, being out in that frame of time if we execute on all these capital projects, largely because of some of the tax rules that are out there. You still have to be a minimal taxpayer for some of the reasons. But we need to execute on all these capital projects to
get to that level. Given the tax rules, as Scott said, it's highly unlikely that we'll ever in a sustained period of time get to absolute 0. So when we say modest taxpayer, for example, I think Scott mentioned $15,000,000 to $20,000,000 this year. So I hope that puts things in context for you.
Yes. No, it does. I appreciate that. And then and just finally in terms of credit and the Holdco debt side, I think you started by saying you've got improving credit and your Holdco debt is now down to 28%. Is there any target we should be thinking about around the Holdco debt level and also the FFO to debt kind of credit that we should be thinking more longer term?
We'll let Scott answer that. We do have an internal cap on where we want to go and where we don't want to go with holdco credit or holdco debt, I'm sorry. Yes.
So we look at that holdco to total debt, it's down to 28%. Our target is to keep it below 30%. Now if there's an opportunity, 1 year it may pop up or down, but we feel comfortable with those ranges in our forecast here and the FFO to debt in that 16% to 18% range. Now last year we hit 18.5%. But remember we were at in a sharing opportunity at Wisconsin Utilities and that money will go back eventually to customers.
So next year maybe on the lower end of that range, but still within that 16% to 18% range.
And that range as you know well supports our current credit ratings.
Yes. Got it. All right. Really appreciate guys. Thanks so much.
You're more than welcome.
Your next question comes from Andrew Weisel with Scotiabank. Your line is open.
Good afternoon, Andrew. How are you doing today?
Hey, I'm okay. Good afternoon. Just want to elaborate on the contracted infrastructure projects. So as of now, what percent of 2020 EPS will come from that segment? And let's assume the 5 year plan stays at 1.8%, seems like the bias might be to the upside.
What percent of earnings would be coming from that segment in 5 years?
Well, I can give you the number for this year. And obviously, we can do a little bit of public math here. But long story short, we got in 2019 about $0.02 a quarter of earnings from our infrastructure investments. Given the addition this year of full year earnings for Coyote Ridge, which went into service at the end of 2019, I would expect about $0.03 a quarter, Scott? Correct.
It will be about $0.03 a quarter. And remember, the other projects we announced are in December of next year. So some impact, but not a lot.
Okay. And then bigger picture, how big are you willing to let that segment be? Obviously, they're high quality contracted assets, but they're not the regulated rate base construct. So do you have sort of a mental feeling of how big that could be as far as earnings mix?
Yes, we do. At the moment, I would say that our internal plan would hold that segment of our business down to about 10% of our earnings.
Okay. Very good. Then just one last one on that same topic. You said you've accelerated the spending, but you're not increasing it. What's the limiting factor of why you're not increasing it?
Is it balance sheet, opportunity for specific projects? It's the happy marriage between the quality projects that we see in
the It's the happy marriage between the quality projects that we see in the pipeline that we are very interested in and our tax appetite. We put it all together and the $1,800,000,000 shakes out to something that we can we think we can both add quality projects to achieve and maximize our tax position.
Okay, very good. Thank you.
You're welcome. Thank you.
Your next question comes from Michael Weinstein with Credit Suisse. Your line is open.
Good afternoon, Michael. How are you?
Good afternoon, Gail. I'm doing great. Hey, just on those that last line of questioning, is there a reason why you won't or you aren't considering tax equity for continued expansion considering the tax upside?
No. I mean, certainly, we would be open to something like that in the future if the economics worked out. Right now, the economics favor exactly what we're doing.
Got you. And on ATC, has there been any impact on long term planning from the FERC's action on ROE in LISA?
Short answer, no.
And I think that Has there been any effect?
Not yet, because as you know, it's now all up in the air again. So, and these are as you know very well, transmission projects have a long gestation period. So I wouldn't expect there to be some kind of a knee jerk reaction in the 1st 30 or 60 days, particularly with all the appeals going on and the uncertainty of what the final result will be. Exactly, Gail. And we're recording at 10.38.
Remember our long term plan, we were assuming 10.2. So 10.38 is a little north of that.
Got you. And I may have missed this before, but where do you guys stand in terms of dividend payout ratio targets? And what's the future growth rate for dividends? Is it just going to track along with EPS at this point?
Yes. So our policy is to pay out in a range of 65% to 70% of earnings. So a dividend payout ratio that is 65% to 70% of earnings. As I mentioned earlier, we're right smack dab in the middle of that range right now. So we would project that dividend growth would be in line with the growth in earnings per share.
Got you. That's all I got for now. Thank you.
All right. Thank you.
Your next question comes from Michael Lapides with GF. Your line is open.
Hey, guys. Thanks for Hey, Gail. Thank you for taking my question. Congrats on a great quarter. I actually have several.
They're all gas related and I'll just kind of rattle them off. First of all, your gas demand forecast of I think it's 0.7%. Can you remind me when the last time you did sub 1% gas demand growth in Wisconsin? That's the first question. The second question is, where do you stand on the permitting and regulatory approval for the gas LNG facility in Wisconsin that you talked about a couple of months ago or a while ago?
And then finally, any incremental thoughts on the need for new gas fired generation, either as part of the transformation or just to meet demand for us?
All right. We'll be happy to try to take those off 1 by 1. I think weather normal, we were at 1.8% on retail gas. So we had a 1.8% growth in retail gas consumption on a weather normal basis in 2019. You can probably go back in terms of when were we last below 1%.
Whatever year that gas natural gas prices got to double digits, I think we did not grow meaningfully at all in terms of natural gas demand from the retail side of
the business. Scott? Yes, exactly. When you think about it, yes, we've had 3% to 4% growth. Last year is 1.8%.
But now what we're really forecasting is really the customer growth aspect, not assuming any more conservation, but also assuming that people don't turn their houses from 69 to 74. People are going to stay comfortable. And we've also seen a lot of conversions the last couple of years from industrial or their own environmental bills to go convert from coal and oil to natural gas. So you only convert once. So basically our forecast now is based on customer growth.
And Michael, on the LNG, as far
as the approval process, it's underway. And as I said in my prepared comments, we expect approval and we will begin construction in the summer of 2021 for operational in 2023.
Got it. And then on the gas generation side and kind of thinking about the mix of gas versus coal fired generation?
Mix of gas versus coal fired?
Yes. Just in terms of thinking about new gas generation needs.
Well, as you know, we have an option with Alliant to buy into at some point between now and say 2024, a portion of their new gas fired combined cycle that's being built right now. That option is still on the table. We haven't made a final decision. Beyond that, we don't have any plans to propose any construction of new gas fired generation. And of course, regardless of whether we add gas fired generation or not, the percentage of gas fired generation in our total mix will be going up and coal will be coming down as we've already retired about 40% of our existing coal fired generating capacity.
Got it. Thank you guys. Much appreciated and congrats on a great quarter and great execution.
Thank you. Thank you so much, Michael.
Your next question comes from Greg Gordon with Evercore ISI. Your line is open.
I'm already losing the bet so far this year, Gail. It's one of those bets in truth, I'd be happy to lose. But anyway, I just wanted to go back to the comment on what your expectations are as they sort of bake into your earnings growth aspiration, the 5% to 7%. You said that you're targeting the authorized ROE without and not assuming that you maximize your opportunity to get into the higher end of the range. Should we assume that the midpoint of your guidance represents earning the authorized return and sort of like the high end represents the ability to achieve other factors like earning that extra 25 basis points?
Or if I'm not thinking about it correctly, can you give us some guidance as how you're thinking about that opportunity and what it might mean for your guidance for your earnings outlook?
Great question, Greg. Everybody in the room is nodding their head. You've got it. If we were modeling it, as we know you would be we would assume fully authorized rate of return gets us to the midpoint of the guidance and then upside from there if we were to get into sharing.
Thank you. Thank you very much. Bye bye.
You're welcome.
Your next question comes from Michael Weinstein with Credit Suisse. Your line is open.
You lost a bet last year, Mike.
One last question, I forgot to ask this. This is more of a strategic question, but around the country, you're seeing some cities ban improvements on the natural gas distribution systems and going for full electrification of heating and everything else. And obviously, the view from the upper Midwest winter is a little bit different than places like California. But do you have any view on where this is all going in terms of natural gas infrastructure spending and you guys are kind of the experts at the turnaround
business there?
Well, it's a very good question. And I think you are correct. In the less in the warmer climates, in the more temperate climates, I mean, there's clearly a push by some of the more active environmentalists to not only move away from coal, but now we have a beyond gas campaign that we're seeing. For us, I think, Michael, it comes back to pure practicality and the recognition that if it's 40 below in the upper Peninsula of Michigan, a heat pump is simply not going to keep your house warm or even if it did, it would be so incredibly expensive that you simply couldn't deal with it. So for our upper Midwest area and with the market share that we have for home and commercial heating with natural gas, I just don't see a major turn away from that for many, many years to come.
I think the other piece of it is natural gas heating, natural gas furnaces continue to get even more efficient. And there are better ways, I think, in terms of running the economy and continuing to reduce CO2 emissions. And if you look now at across the U. S. And in the upper Midwest, the number one contributor to CO2 emissions is no longer power generation, for example, it's transportation.
I think the low hanging fruit here in terms of continuing to decarbonize the economy, particularly in a region like the one we serve, is not moving away from natural gas home heating. It's actually electrification for vehicles.
Kevin, I don't know if you
have any view on that.
Gil, I think you summed it up very well. The other thing that I just will add is, as technology continues to evolve on the gas side, we'll continue to be in a part of that and looking at it. But I think he summarized our position and our philosophy very well.
Okay. Hope that responds to your question, Michael.
Yes, great. Thank you very much. Talk to you
soon. Your next question comes from Vedula Murti with Avon Capital. Your line is open.
Yes, Vedula. How are you doing? Well, apparently not so well.
Vedula Murti, your line is open.
Good afternoon.
Hi Vedula.
One item I wanted to make sure I understood because you see the line item and I just want to make sure you could explain it to me. Can you explain to me what kind of how the Rabbi Trust works, kind of how it's funded, its duration and kind of how it replicates itself over its life?
Sure. We'll be happy to take a stab at it. I'm going to let Scott do that. I will say this, we have to make sure that all of you don't look at the Rabbi Trust in isolation. As in many ways, the Rabbi Trust is the earnings in the Rabbi Trust offset the cost of some of our benefit plans.
And I think conceptually that's an important point to remember. Scott?
Yes, that's exactly it, Gail. So the Rabbi Trust is really set up by Entegris and we inherited that investment vehicle and that is related to some of the deferred compensation that individuals from Entegris had earned through the years. So what the Rabbi Trust does is what we do is we try to match the best we can the expense of the deferred comp that's in the utilities with the investments in this rabbi trust. So if the rabbi trust goes up a dollar usually the deferred comp expense goes up a dollar or vice versa. So it's really trying to match that.
We have those funds. They're tied up specifically for the deferred comp. So there's nothing else we can use for them. We had to do and we thought the best thing to do was try to mirror and match the hedging as much as possible. Like Gail said though, you can't look at it in isolation just for accounting purposes.
It has
to be on this line, how it's recorded. And Vedula so far, and again, we inherited that in 2015 with the Integris acquisition. So far, our strategy, our matching strategy, if you will, has worked exceptionally well.
So as I think about this, is the variance here tied to stock market performance, performance of Wisconsin Energy's Equity specifically or what creates the variances both up and down
in this?
All
right. And again, we'll let Scott give you more detail. But long story short, we know what investment options are people who've got the deferred comp are in. In other words, we know what investment options they've selected. We can blend that with our investment options in the Rabbi Trust.
Yes. And a lot of the investment options are dealing with equities in the deferred comp and that's what we're trying to match it the best we can. It's not perfect, but the best we can with equities in the Rabbi Trust. And so far, the correlation has been pretty high,
like 99%, been pretty good.
And so this is a static thing going forward. There's no new participants or incremental
No, no new participants.
It's static and it slowly goes down as participants withdraw from the old Entegris deferred comp. So it's slowly going down.
Okay. And I
guess also, I guess, and the other thing, obviously, and this is clearly part of the strategies in terms of the on the income tax expense line in terms of the wind credits and everything like that. Clearly, if we take a look at page 10, it's a major that's a very important positive factor. And year over year is a very large increase. How should we be thinking about that in terms of within the earnings guidance range about the variance going forward there?
We can certainly give you the comparison of what we achieved in terms of the infrastructure segment earnings in 2019 versus our projection in 2020. As I mentioned earlier, the infrastructure segment gave us about $0.02 a share uptick in earnings each quarter during 2019. And with the addition of Coyote Ridge Wind Farm in South Dakota, which went commercial at the end of last year and will give us a full year this year, we would expect $0.03 a quarter from the infrastructure investments in wind.
Yes. And I think overall, when you look at it, including the unprotected we're giving back in the credits to our customers, that effective tax rate is in that 16% to 17% range. And to clarify, it will
be an incremental penny a quarter in 2020 in terms of the earnings.
Yes. So given the fully diluted share count, it would appear then that that variance should be something similar, not as dramatic year over year?
Yes, that's exactly right.
Okay. And it's only about 3 weeks to pitchers to catchers. So how are the brewers?
Brewers are interesting. They're kind of reshuffling the deck a little bit. Just signed the pitcher yesterday, but I'm more focused right now on 41.6 for the bucks.
Okay. Well, good luck there. Thank you.
Thank you, Vedula.
And your last question I'm sorry, your next question comes from Andrew Levi with ExodusPoint. Your line is open.
Yes, that Greek freak.
Hey, Andy, how are you?
I'm doing great. Love watching him, but I'm sure you do too. And you got big game tomorrow against Denver.
We do. We do. Yes. Yes. And I think the analysts will be back in the lineup.
Yes, I hope so. So just kind of following Michael Weinstein's questions and just on kind of natural gas. I guess and you've kind of answered it already, but just also just in the context of like ESG and obviously ESG seems not to be favoring natural gas. So maybe just explain how you deal with that? And then separately, I agree with everything that you had said earlier about natgas.
Just kind of looking at kind of the landscape and if you look at LDCs or companies that are very heavy natural gas, their stocks have not done as well as late and the multiples have come down. And so I'm just wondering kind of where your head is at and at the right price, would you add gas distribution customers to your mix beyond what you have already? Obviously, you have a large LDC in Illinois and a smaller one in Wisconsin.
Well, good question, Andy. You never say never, but let me put it this way. At the right price, obviously, fitting the 3 criteria that we've talked about for acquisitions, I mean, we would always take a hard look. I would though, because you recognize if you're making an acquisition of any kind of company, LDC or not, you're basically making a very long term bet. Our assets as you know are very long lived assets.
So would I'm saying this just theoretically, if an LDC in Northern North Dakota came up for sale at the right price, probably would be a lot more interested in that than if it was in San Diego.
I understand. And just as far as ESG and how you kind of do you think maybe obviously that it's an evolving idea or investment basis? Do you think as far as natural gas, they've gone or not they, but it may not be the right way to look at it and there are other things to focus on the ESG side?
Well, again, a good question, Andy. My sense and we've done dozens of ESG visits. Right now and I think for the foreseeable future, the ESG focus for infrastructure companies like ours seems to be heavily, heavily focused on CO2 emissions and what your plan is to basically decarbonize the generation fleet. That swamps any other kind of discussion that we've had with any ESG oriented investor. And again, we've had 100 of these discussions over the course of the last couple of years.
In fact, everyone now whether you are ESG focused or not, everyone is beginning to ask ESG questions. But I would say that in 99 out of 100 meetings, the real focus is on is really on CO2 emissions and there we've got a great story to tell. The other thing that I would point out, we're one of the first utilities in the country to set a methane reduction goal. And I think you're going to be seeing because the climate scientists, as you know, really believe that methane emissions are far, far more potent perhaps 25 times more potent than CO2 as a greenhouse gas. I think you're going to be seeing some increasing focus on methane emissions.
And there, the kind of upgrade work we're doing to modernize the natural gas distribution network, particularly in Chicago is really important. So those are the kind that's the flavor of what we're hearing in our ESG visits today, Andy.
Okay. Thank you, Gail.
You're welcome. And good
morning, everyone. Thank you.
And your last question comes from the line of Paul Patterson with Glenrock Associates. Your line is open.
Paul, your last but not least.
I hope not. So let me ask you something here. Just to follow-up on Vedula's question. The Rabbi Trust, if I understand your answer, basically is offset by deferred comp expense. So there really isn't any net income benefit of any significance you see driving earnings going forward or in terms of results for 20 19.
Am I understanding you correctly?
Correct. 2019 may have been an anomaly because we had so much O and M coming out of the utility that we were into the sharing. But for the most part, there's no benefit from that at all. But it would have been a small amount.
And nothing, Paul, that we're planning on in terms of benefit for 2020.
Okay. And then in terms of Foxconn, there's some local articles about the Evers administration looking at renegotiating the tax benefits because of I guess the way the Foxconn thing has been sort of rolling out. And I was just wondering if you had anything to share on that or what does that mean in terms of the outlook for the Foxconn Economic Development Contributions that you guys have been expecting past years?
Right. Good point. And let me just reiterate first what I mentioned in our prepared remarks in that over the past 2 years Foxconn has invested already over $500,000,000 in Wisconsin. I can tell you, again, I've said before, focus on what's going on in the campus rather than the media reports, but I can tell you, I was actually with the Governor yesterday. He and I appeared together at an economic development conference here in Milwaukee, and he went out of his way to say that he believes his responsibility is to help make Foxconn successful in Wisconsin.
So again, that's as of 9:30 yesterday morning and a very definitive comment from the Governor himself.
Okay, great. And then just finally on the wind transaction with Google as the offtake, That's for the life of the project, is that correct?
That would be a 12 year offtake agreement.
That's 12 years. Okay. And then just generally speaking, given the credit quality of Google and stuff, just to make sure I understand this, that's a better rate of return than you're getting. You guys perceived you guys expect to get a better return associated with that project than what you're getting in your regulated business. Do I understand you guys right on that?
You understand this absolutely correctly. And the experience that we've had so far with the other infrastructure investments that are operational, the experience in 2019 is proving that out.
Okay, awesome. Thanks so much.
You're welcome. Thanks for the call. All right. Well, folks that concludes our long conference call for today. Thank you so much for participating.
If you have any other questions, we're always available. Please contact Vastraca at 414-221 4639. Take care everybody.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.